Sunday, March 21, 2010

Law 75 comes under attack at a conference ….and this is not the final chapter

Last week, the Foundation of the Federal Bar Association, Puerto Rico Chapter, and the Foundation of the Historical Society of the Supreme Court of Puerto Rico sponsored a conference on Judicial Independence and Economic Development in Puerto Rico. Among the panelists were distinguished practitioners, Judge Cabranes of the U.S. Court of Appeals for the Second Circuit, and a professor of economics at the graduate school of the University of Puerto Rico. Among those attending were Justices of the Supreme Court of Puerto Rico, Judges of the U.S. District Court for the District of Puerto Rico and members of the federal bar.

The theme of the presentation was to establish a positive correlation between states and countries that have a strong and independent judiciary that values observance of the rule of law and economic development. It is not surprising, but disappointing, that such an important conference has received so far no coverage in the press.

Law 75 has come under attack almost since its inception in 1964 as a protectionist statute. Some court decisions and commentators have objected to the statute as being anti-competitive. Law 75 has thus far survived constitutional challenges under the Due Process Clause, and the Dormant Commerce clause including arguments of preemption under federal trademark and antitrust laws.

With the globalization of commerce it is hardly surprising that Law 75, as many other laws that are perceived to act as obstacles to freedom of commerce, will come up on the radar screen as it did at the conference last week. To a packed house full of lawyers, judges and possibly legislators, the economics Professor espoused the repeal of Law 75 as creating intrabrand monopolies and as harmful to economic development. The Professor concluded that Law 75 causes artificial increases in the prices of goods and services to consumers. He described an experience in Uruguay that repealed a law similar to Law 75 and stated that the Dominican Republic also repealed its dealer protection statute (an assertion which I believe may be factually erroneous). At least 18 states of the Union and many countries still have laws similar to Law 75.

When asked to provide empirical economic support for his conclusions, the Professor admitted that he had conducted no analysis, and knew of no study, that supported his conclusion that Law 75 causes or contributes to price differentials of goods and services between Puerto Rico and the continental United States. He said that the distribution industry was opposed to conducting studies as if to suggest there is something to hide. What precludes the academic world from doing the research independently is odd!

The Professor was unable to reject other plausible and independent explanations; that is, that price differentials may arise from unrelated market conditions, such as the imposition of high tax rates on both imports and the sale of goods to consumers (the exorbitant taxes to luxury vehicles are but one example), and other high fixed costs on imports (e.g., freight and insurance costs). Further, the Professor assumed that intrabrand monopolies created by exclusive distributorships are inherently pernicious to consumers when that is not necessarily so. For one thing, the antitrust laws are primarily concerned with interbrand not intrabrand competition. When a distributor prices a product or service above its competitive level, the elasticity of demand dictates that consumers will change their spending and consumption patterns toward another brand or service. That sort of explains why the pricing points at the supermarket of Coke and Pepsi, for example, are basically identical even as some consumers may stick to their brand despite price increases (up to a point). Absent collusion between manufacturers of competing brands or products, from an economics standpoint, the distributor that uses its intrabrand monopoly to reap higher profit margins will be forced by the market to lower its prices in order to remain competitive. On the other hand, exclusive distributorships help to eliminate “free-riding” by other dealers and theoretically require the exclusive dealer to do more to promote the sale of the principal’s products. And, contrary to popular belief, Law 75 protects but does not require exclusive distributorships.

Without reliable economic research, it is easy if not irresponsible for one to advocate the repeal of Law 75 as not serving the public interest. It remains to be seen if any lasting impressions have been left on the policy makers attending the conference by the facially appealing, but superficial, viewpoint of the Professor that Law 75 acts a barrier to economic development in Puerto Rico.